"Price and Tax Effect on Consumption of Alcoholic Beverages"


By


Dr. Bijaya Kumar Nayak
Researcher & Management Consultant
 


Alcoholic beverages have been available throughout the world for centuries and civilizations in almost every part of the world developed some type of alcoholic beverage. Alcohol's importance was never confined to the mystical, however, throughout its history, it has been used socially for many diverse purposes, such as calming feuds, giving courage in battle, sealing pacts, celebrating festivals, and seducing lovers. Alcoholic beverages occupy a prominent place among branded consumer goods. Alcohol market generates huge profits and tax revenues through increase in production, distribution and sale in one hand but consumption of various alcoholic beverages causes huge loss and harm to the society on the other. It generates substantial profits to producers, distributors and retailers and it also increases revenue of the national and state governments. Alcohol consumption has often been described as a double¥edged sword. On the one hand, it is deeply engrained in many cultures, as it contributes to pleasure and positive well¥being. On the other hand, it is a major risk factor for health harms, and it also contributes to a personal and social burden of disease, injury and social problems. Alcohol is a major contributor to an array of economic costs and social problems in India. These include lost productivity, health-care expenditures, motor vehicle accidents, fetal deformities, spousal and child abuse, violence, crime, accidental falls, fires, drownings and suicides. The demand for alcohol is a function of alcohol price, alcohol advertising, and other variables affecting alcohol demand such as income, availability of alcohol, alcohol sentiment and other taste variables. Aggregating across consumers' results in the market demand function, the consumption of alcohol is the function of price, income, marketing and advertising.

The 'drinking' in India is remained a bad word, clubbed with the other vices. Heavy alcohol use is now shameful, weak and showing a lack of control as opposed to a bad habit. The production, sale and consumption of alcoholic beverages are legally allowed in many states of India are called wet states  and also banned in some states of India such as Gujarat, Manipur and Nagaland are called dry states. In these dry states alcoholic beverages are legally not allowed but illegally available in plenty which result in huge loss of revenue to the state exchequer and huge profit for bootleggers and smugglers. Today India is one of the fastest-growing alcohol markets in the world. Urbanisation, together with changing social norms, increased alcohol availability, high intensity marketing and relaxation of overseas trade rules have equally contributed to increased alcohol consumption. But in an interesting way, the history of alcohol consumption follows the laws of supply and demand. The alcoholic beverages market contains a vast array of product offerings which are targeted at distinct group of consumers with greatly varying levels of overall marketing effort such as new product development, packaging, pricing, advertising and promotion, sponsorship, new media campaigns and distribution to deliver profitability through maximum consumer satisfaction. Taken together, these marketing strategies communicate a powerful message about alcohol's role in society.

Throughout history alcohol consumption has generated debate, controversy, and a diversity of government responses. Alcohol is a legal product regulated by law; therefore, there are many mechanisms that can be used to control its price and the way it is promoted and made available for sale or consumption. Availability, promotion of and access to alcohol is controlled, regulated and enforced through legislation, laws and policies by government at the federal, state, and local levels and also controls be imposed at the level of the individual sales establishment. Availability policies can be divided into those affecting the physical availability and into those affecting the economic availability of alcoholic beverages. Retail alcohol monopolies, licensing systems, specific restrictions on sales-hours and days, as well as places and densities of alcohol retail networks are all examples of how the physical availability can be regulated. Age limits and personal control, for example refusing sales to intoxicated persons or applying a maximum size or numbers of drinks that can be purchased in one go, are also measures of this kind. Economic availability of alcohol can in turn be steered by changing excise duties or value added taxes, or by setting minimum prices of alcoholic beverages or by regulating discount prices.  The price and consumption of alcoholic beverages are affected by both economic and physical availability policies of the government.

Alcohol, however, is no ordinary commodity. Unlike most other commodities, alcohol is an addictive, psychoactive substance. Alcoholic beverages are commercial products and, as such, subject to the same economic principles as other consumer products.
The most fundamental law of economics links the price of a product to the demand for that product. Price normally refers to the currencies (Indian Rupees, American dollars etc.) outlaid for the product or service. However, it includes other costs associated with 'buying' the product, such as transport time and foregone opportunities.  Alcohol prices are determined by a range of factors including cost to the producer and retailer, strategic decisions about profit margins, total sales level, levels of taxation (excise duty and value added tax),excise policy of the state government and the balance between supply and demand.

As with many other commodities, the retail price of alcoholic beverages is determined by several factors. The most important factors are production costs, these include the costs of the inputs (e.g. molasses, grains, hops and grapes), and the costs of processing those inputs (manufacturing and bottling), as well as wider marketing costs (e.g. for creating, establishing and maintaining brands); the costs of transporting, distributing, and retailing; the demand and supply for alcoholic beverages; the level of competition (e.g. between different retailers, and between alcohol producers); the quantity purchased (e.g. bulk discounts, such as a case for distilled spirit, keg/case of beer, pitcher of margaritas, case of wine) ; the level of taxation (e.g. value added tax, excise taxes and specific alcohol taxes);  the type of retailing (on and off-trade). Retail prices of alcoholic beverages are composed of the wholesale price plus profit and other costs. In addition, taxes specific to alcoholic beverages are often added. One of the factors explaining price differences in different parts of India is the rate of alcohol taxes. Production costs per litre of pure alcohol are higher for making wine and beer than distilled spirits. That is one of the reasons for the usually higher tax on spirits. Another reason is that, in some countries, the official policy of the pricing system is to steer people towards a particular type of low-alcohol or non-alcoholic beverage, in order to substantially reduce the harmful effect of alcoholic beverages, discourage spirits drinking and encourage beverages with lower alcohol content.

Alcohol is a volatile fluid, a valuable commodity and a prominent item of trade. In India, as in many countries worldwide, alcohol pricing and taxation continue to be used primarily as fiscal rather than public health instruments, with alcohol being considered primarily an economic commodity. In many countries, alcohol is an important source of revenue for governments, and therefore, an established target of taxation.
Governments use their political authority to raise revenue. The ongoing process of liberalization, privatization and globalization in the restructuring economies of the region has seen the liquor industry becoming stronger with rationalization of taxes. In most societies, beverage alcohol - beer, cider, flavored alcoholic beverage, wine, distilled spirits, country spirit and intermediate products is subject to taxation, mostly as an excise tax. There is a wide variation between tax rates between countries, between states within a country and between alcohol beverage types.

Alcohol is a discretionary item, not a necessity and the definition of an alcoholic beverage sets the guidelines for the application of national laws, mainly for taxation purposes. Historically, alcohol has been subject to excise taxes for two reasons, firstly to reduce alcohol consumption and alcohol related problems and secondly to raise revenue for public purposes. However, governments also use taxes on beverage alcohol for several other purposes namely to attempt to reduce abuse and harm by making alcohol less accessible; to create trade barriers; to encourage the purchase of domestic over imported products. Taxation is used as a means to limit the demand for alcohol by raising its cost, making it less accessible to consumers. The main purpose of taxation is to generate general government revenue. In many countries, alcohol is an important source for raising government revenue and has long been an established target for taxation. Excise taxes are levied by national, state or local governments, and often in combination with each other. The actual costs of excise taxes are generally passed along to consumers in the form of higher prices, putting downward pressure on consumer demand. The effectiveness of taxation and pricing policies as public health and social tools for reducing consumption, abuse and problems has been much debated and can be considered from several perspectives.

In most societies, beverage alcohol - beer, cider, flavored alcoholic beverage, wine, distilled spirits, country spirit and intermediate products is subject to taxation, mostly as an excise tax. There is a wide variation between tax rates between countries, between states within a country and between alcohol beverage types. Excise taxes are indirect taxes on the sale or use of specific products or transactions. The tax is often passed on to people and organizations that purchase particular products or services. A tax based on the presence of alcohol in a product is an excise tax. The liquor industry has traditionally been a money-spinner for the government of India. Most of the states obtain 15-20 per cent of their revenue from excise on alcohol. This is the second largest source of a states' exchequer. Excise department is the second largest revenue earning department of the government and charges multiple taxes on liquor, which is an important source of revenue for them. Liquor is a state subject and, hence, there are inter-state disparities in tax structure. And, most of the states charge multiple taxes on liquor, which is an important source of revenue for them. The state governments collect various excise and other taxes and fees for issuing of new and renewal of licenses for production, storage, distribution and sale of alcoholic beverages, import and export of alcoholic beverages, gallonage fee, literage fee, registration and renewal of labels of alcoholic beverage brands, value added tax (VAT), tax collected at source (TCS), mono cartoon registration and renewal fee, profile registration fee, transportation fee and excise duty etc which in turn affects the pricing of alcoholic beverages for consumption.

The different populations have established different patterns of belief and behaviour with respect to changes in price of alcoholic beverages and their impact on consumption. From an economic perspective, alcoholic beverages are consumer goods, and therefore, what is known about consumer behavior in general is likely to be seen in alcohol consumption also. The economic model of consumers' behavior is that, other things being equal, consumers demand for a given commodity falls when its price rises and vice versa. There are growing number of economists have examined the impact of the price of alcoholic beverages on alcohol consumption and there is substantial research evidence to demonstrate that the sale of alcohol is price responsive. That is, a rise in the price due to increases in production costs, profits, and/or taxation results in reduced per capita alcohol consumption and conversely, a reduction in price results in an increase in consumption.

The consumers' response to changes in alcoholic beverage prices is an especially important topic for investigation. A significant amount of research has focused on the price sensitivity of alcoholic beverages and also an extensive body of research demonstrates that consumers respond to changes in alcohol prices in much the same way as they respond to changes in the price of other commodities. Research on alcohol misuse shows all drinkers respond to price changes to some degree. In order to examine the relationship between price and purchase of alcoholic beverages by the consumers for consumption in the state of Assam, a research study was conducted by the author among 2000 alcoholic beverages consumers spreading across the state in the year 2014. One of the objectives of the study is to find out the changes in consumers response to changes in prices of alcoholic beverages. In order to draw inferences from this objective a  hypothesis
"Higher prices of alcohol beverages have significant role in  reducing alcohol consumption" is formulated. In order to test this hypothesis a research question "Would you buy less alcoholic beverages if the price would increase?" was asked to the alcoholic beverages consumers. The attitude of the sample consumers towards the purchase of alcoholic beverages as the price of the beverages increases is about 66 per cent of the surveyed respondents say as yes, while nearly 25 per cent said negatively and 9 percent remained neutral and therefore the hypothesis "Higher price of alcohol beverages has significant role in reducing alcohol consumption" is accepted. It implies that higher prices of alcohol beverages have significant role in reducing alcohol consumption. Thus, the conclusion drawn from the study is the consumption of alcoholic beverages is significantly influenced by price. The present study investigating such a relationship found that, alcohol prices are one factor influencing alcohol consumption among all sections of people in Assam.

Alcohol prices are determined by a range of factors and the most prominent factors are levels of taxation (excise duties and value added tax). Taxation is a key lever and blunt tool for governments to influence alcohol prices, and has been shown to be an effective instrument for reducing alcohol consumption and alcohol-related harms. There is strong and consistent evidence to suggest that price increases (including through taxation) have a significant effect in reducing demand for alcohol. The alcoholic beverages are important source of revenue for government and the state government uses taxation as fiscal instruments. The research generally finds that increase in the price of alcohol (through imposition of higher taxes) reduce consumption. Although there is a consensus among researchers that higher alcoholic beverage prices and taxes result in less drinking and the precise magnitude of consumer response to price or tax changes has been somewhat harder to determine. There is substantial research evidence to demonstrate that the sale of alcohol is price and tax responsive. That is, a rise in the price and tax result in reduced per capita alcohol consumption. In order to study the impact of taxes on alcoholic beverages and consumption which is another prime objective of the research study by the author and also to test the hypothesis "The high tax regime is an effective deterrent to keep away the first timer and to reduce the frequency of alcohol drinking" a question "Would you buy less alcoholic beverages if the price would increase due to increase in alcoholic beverage taxes?" was asked to the sample alcohol consumers and the information were collected from them. Their attitude towards the taxation on alcoholic beverages and its consumption are reflected as; 56 per cent respondents agree, and 35 per cent disagree while around 9 per cent remain neutral. So it is concluded that the high tax regime is an effective deterrent to keep away the first timer and to reduce the frequency of alcohol drinking.  This means that excise taxes and other public policies that affect the price of alcohol can influence the demand for alcohol and alcohol consumption.

Price is a key determinant for access to alcohol. There is strong and consistent evidence from this research study by the author demonstrates that, increase in the price of alcoholic beverages is associated with reduced consumption at a population level.  Access to cheap alcohol has been found to correlate with increased total alcohol consumption. The present study has determined and the evidence which indicated that, in general, the way drinkers respond to changes
in the price of alcohol, that increases in the total price of alcohol can reduce drinking and a rise in the price and tax result in reduced per capita alcohol consumption. The testing of two hypotheses complement each other and provide a richer and more complete understanding of the nature of price and tax effects on consumption of alcoholic beverages.

This study focused on summarizing current understanding and providing additional analysis relevant to the Indian situation that can help, inform decision-making specifically around the pricing, taxation of alcoholic beverages and their influence on alcohol consumption.
Although there are various other policy options, this study has concluded that price had a much greater influence on alcohol consumption. There is strong and consistent evidence to suggest that taxation or price increases have a significant effect in reducing demand for alcohol and serve to decrease consumption. In establishing alcohol policies, the state governments should weigh commercial freedoms and consumers' rights of access to a product against protecting their citizens. This includes determining levels of taxation that do not impose an undue burden on consumers and restrict their choices, penalize producers by restricting fair trade practices. A "Model Excise Policy" must be formulated by the state governments which should ensure that the objectives of minimization of consumption and maximization of revenue are achieved without putting unreasonable restrictions on the individual's freedom of choice and unreasonable high taxation. Raising rates beyond the threshold, instead of generating higher revenue and discouraging consumption, would lead to evasion of taxes, smuggling and illicit distillation. Efforts should be made to rationalize tax and policy regimes so as to plug leakages and realize full revenue due to the state for genuine and responsible drinking.

The writer is a researcher and management consultant and feedbacks can be send to
Email Id: bknayak01@gmail.com.
 

                                                                                                                                                                               

   Published on IndianFaculty.com: 03/05/2015

 Source: E-mail 03/05/2015

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